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UPDATE 2-Bulgaria plans 10 pct tax on income on bank deposits

* Tax should raise 120 mln levs next year

* Govt approves budget targeting 1.3 pct/GDP fiscal gap

* New tax will not hurt banking system as a whole-CentralBank

(Add central bank comment)

SOFIA, Oct 10 (Reuters) - Bulgaria plans to tax people'sincome on their bank deposits from next year as part of a budgetaimed at keeping the fiscal deficit down, Finance MinisterSimeon Djankov said.

Economists slammed the government's decision to introduce a10 percent tax on bank deposit income from next January, whichcould raise 120 million levs ($79 million), saying it would onlyhurt people's savings.

The centre-right cabinet plans to keep income and corporatetax rates unchanged at 10 percent, one of the lowest levels inthe European Union.

It aims for a budget gap of 1.3 percent of gross domesticproduct, unchanged from this year, but expects economic growthof 1.9 percent in 2013, which would support its plans to raisestate pensions before a summer election.

In a bid to shield against an economic downturn, manyBulgarians have been stashing money in banks. Household depositsgrew by 13.8 percent in the year to the end of August to 33billion levs, central bank data showed.

"Bulgaria is the only country in the EU that does not taxthat income. The key is to improve equality. At present, richerpeople with bank deposits do not pay tax on that income,"Djankov told reporters.

The decision came as a surprise, however, as the financeministry denied in September that it was considering such amove. On Wednesday, the central bank said it had not beeninformed about the plan.

The new tax will not have a direct negative impact on thestability of the banking system as a whole, the central banksaid in a statement. But it noted that bank deposits are thebest option for household's savings.

Analysts attacked the new tax saying it would reduceincentives to save and limit banks' ability to fund the economyand would likely increase the cost of lending, much needed toboost growth, while its fiscal effect would be limited.

They welcomed the fiscal targets but criticised the cabinetfor failing to reform the inefficient pension and healthcaresystems, that could have improved spending and helped restartthe struggling economy.

"The government is likely to waste a lot of political energywith that idea for a new tax that will have a limited fiscaleffect at its best, instead of focusing on much-needed reforms,"said Georgi Angelov, economist at Sofia-based Open SocietyInstitute.

The budget plan and new tax still have to be approved byparliament, where the government has a working majority thanksto support from smaller parties. Bulgaria's economy is expectedto expand about 1.0 percent this year.($1 = 1.5167 Bulgarian levs)

(Reporting by Tsvetelia Tsolova; Editing by Sam Cage and HughLawson)

((tsvetelia.tsolova@thomsonreuters.com)(+359-2-9399-731)(Reuter

Messaging: tsvetelia.tsolova.thomsonreuters.com@reuters.net))

Keywords: BULGARIA BUDGET/